As the recent bankruptcy of the FTX platform reminds us, delegating the custody of your bitcoins to an investment platform is not without risk.
In this article, we look at a practice that builds trust and security in the area of bitcoin custody: account segregation. By keeping client assets separate from company funds, we explore how account segregation offers additional protection for the investor, especially in the Bitcoin space.
Understanding account segregation
Account segregation is a practice of keeping customer assets separate from business assets.
This mechanism embodies a form of transparency and additional protection for the investor. On the one hand, this ensures that customer funds are not used in the company's day-to-day operations. On the other hand, it guarantees the investor that their assets will not be liquidated to repay the company's possible debts.
In other words, if the business goes bankrupt, creditors cannot seize customer assets to pay off the company's debts because these assets are kept in separate accounts.
In the context of investing in Bitcoin, this concept of account segregation takes on particular importance.
Account segregation in the field of Bitcoin
When you buy your first bitcoin, you have two options. You can choose to keep them yourself and take full responsibility for them (“self-custody”). Or, you can choose to delegate the custody of your bitcoins to a company. Often, this platform is the same platform on which you purchased your cryptocurrencies.
Opting for the first alternative means that you will be responsible for securing the cryptographic keys that give access to your bitcoins. It's a bit like choosing to store gold right at home. This option of autonomous storage of your bitcoins allows you to minimize the need for trust in a third party. But in return, you fully assume the risk of losing and stealing your funds.
Bitcoin was designed for its users to manage their funds in this way. But this requires being comfortable with the computer tool, and understanding the mechanisms involved. It's clearly not for everyone.
The second option is to delegate the custody of your bitcoins to specialized companies. However, as the recent FTX incident reminds us, not all cryptocurrency exchanges respect account segregation. This can lead to situations where user assets are lost in the event of business bankruptcy or cyber attacks. Exchange platforms can also sometimes do fractional reserve, meaning they don't have as many bitcoins as they claim from their customers.
Therefore, if you choose to leave your bitcoins to a company that specializes in custody, it is essential to ensure that this platform practices account segregation. If this is the case, your bitcoins are legally and physically separated from the platform accounts. This allows you to minimize the risks associated with this option.
For the time being, PSAN registration does not require French industry players to comply with account segregation. However, it will be mandatory as of next year.
To understand this, it is necessary to differentiate between two statuses: PSAN approval and PSAN registration. Some activities related to Bitcoin, such as buying, selling or keeping, require obtaining a PSAN (Digital Asset Service Provider) registration. This status is obtained from the Autorité des Marches Financiers. The administration checks several elements about the company, such as the competence and integrity of the managers. A company that wishes to obtain registration must also comply with regulations related to the fight against money laundering and the financing of terrorism. To date, over 80 businesses, including Bitstack, have acquired PSAN registration.
PSAN approval, on the other hand, is entirely optional. It is more difficult to obtain since the AMF checks many other points such as:
Possession of RCP insurance or significant equity;
The establishment of internal controls;
The possession of resilient computing devices;
The establishment of complaint procedures...
In reaction to the fall of FTX, the Senate passed a law in early 2023 to make this approval mandatory. This law was finally not passed by the National Assembly, preferring to wait for the European MICA regulation. However, it was voted that PSANs will have to comply with a so-called “reinforced” registration as early as 2024. This new reinforced registration will make account segregation mandatory for PSANs.
Account segregation on Bitstack
At Bitstack, we did not wait for the PSAN regulations on enhanced registration to implement strict segregation of our customers' accounts. We've been following this practice since the app was launched in 2022. It is a key part of our commitment to transparency and ethics. Therefore, all of our customers' bitcoins are managed independently of the company's balance sheet and kept in separate accounts (or “wallets”).
In order to prevent the misuse of customer funds, we have put in place various protections. In the unlikely event that Bitstack went bankrupt, users' bitcoins would not be likely to be claimed by creditors. At Bitstack, customers always remain the true owners of their bitcoins.
In addition, since we deeply believe in the Bitcoin and self-custody model, we are taking concrete actions to make it easier for those who want to choose this option. The fees for withdrawing your bitcoins from our application are fully covered by Bitstack. Unlike many other platforms, we don't charge any commission on bitcoin withdrawals. But it goes further, since we also take care of the on-chain fees on your withdrawal, which are inherent to any transaction on the Bitcoin network. In other words, withdrawing your bitcoins from the Bitstack application to an external wallet costs the user absolutely nothing.
Beyond this advantage, we have set up a real educational hub for beginners with the podcast, the blog and the newsletter Understanding Bitcoin. Thanks to this numerous free contents, you can learn more about Bitcoin and how it works. We have already published over forty technical articles, and new content is coming out every week. If you want to know more about self-custody to be completely independent in the custody of your bitcoins, you can consult our section” Securing your bitcoins ”.
Conclusion
Account segregation is a protection measure for investors, which can be implemented by some investment platforms. It consists in maintaining a strict separation between client funds and company funds.
As part of an investment in bitcoin, this measure makes perfect sense. It makes it possible to reduce as much as possible the need for trust in the platform that keeps the investor's bitcoins. However, account segregation is absolutely not mandatory in the cryptocurrency industry, even for PSANs in France at the moment. At Bitstack, we have maintained a strict segregation of client funds since our launch.
